The Worst Precious Metals Meme of 2015

It’s been a while since I wrote a post designed to help the followers of the many precious metals charlatans out there who try to make a buck by selling lies and confirmation bias. Since it’s the holiday season, and I’m feeling generous, I figured I’d write a post about the most ignorant meme touted across the precious metals blogosphere in the second half of 2015. I want you to keep in mind, dear reader, that you will get the opposite of confirmation bias from this post. This post will clearly explain to you how the guru you hold in such high esteem is consistently demonstrating his own ignorance. The question for you to decide is: are you being misled out of ignorance (you’re listening to an idiot)? or malice (you’re listening to a con man)? Let’s get to it.

Have you seen a chart that looks like this, breathlessly ranting about the “COMEX Leverage Ratio” or “Paper Gold Cover Ratio” ?

In this post, I’ll explain to you why the chart is nonsensical, and thus why no one should be surprised that this ratio doesn’t correlate with the price of gold.

For background, I suggest you read an important post I wrote more than 2 years ago titled “Precious Metals Charlatans: Freaks of the Industry,” where I explained how the then-goto-meme about the registered and eligible inventory at the COMEX was utter nonsense. Then, as now, we should start with the definition of registered and eligible metal. We don’t need to speculate on what the definition is, we can look it up right in the rulebook:

“Eligible” shall mean, with respect to any metal, that such metal is acceptable for delivery against the applicable metal futures contract for which a Warrant has not been issued”

“Registered” shall mean an Eligible metal for which a Warrant has been issued.

…

“Warrant” shall mean a document of title issued by a Licensed Facility, meeting the requirements of Article 7 of the Uniform Commercial Code (“UCC”), and demonstrating that the referenced quantity of the covered metal , stored in the Licensed Facility referenced thereon, meets the specifications of the applicable metal futures contract”

Let’s step back for a moment and review how the COMEX works. COMEX is an exchange. It matches buyers and sellers of futures contracts and facilitates settlement between the two. A COMEX future is a contract for the seller to deliver to the buyer, at a time of the seller’s choosing during the delivery month, the referenced underlying quantity of metal. For gold, this contract size is 100 ounces. The seller transfers the (electronic) warrant to the buyer, which satisfies the delivery requirements. In my prior post on the subject, I explained what we would see in the daily spreadsheet published by the COMEX that quantifies warehouse inventories:

“Now, after the long takes delivery, the long can do whatever he wants to with the warrant.

He may 1) detach the warrant (converting the metal from registered to eligible),
he may 2) take the metal out, bring it home, and bury it in his backyard,
or he may 3) simply hold it as is and sell his warrant next month (or not!).

What will we see in the depository inventory spreadsheet in each of those scenarios? 1) registered metal decreases while eligible metal increases. 2) registered metal decreases. 3) no change in either category.”

A recent example of that spreadsheet looks like this:

Are you with me so far? So what’s the moronic meme behind this post? Some precious metals “analysts” have latched on to the ratio of total open interest to “registered” inventory. They have redefined “registered” inventory in a number of ways in order to try to give this meaningless ratio some sort of implied legitimacy for readers who don’t know any better.

As we’ll see in a moment, the mistake these charlatans made was that they all started off as equating “registered” gold with the only gold available to be delivered. That’s false, and basing a thesis on this false foundation leads to a rabbit hole of nonsense and hype. All gold in the COMEX warehouse is available to be delivered, it just needs a warrant attached to it, which makes it registered. Here’s where some will get confused and think I’m making a nit-picking semantic argument, but I think it’s easily understood by the “square/rectangle” analogy. All squares are rectangles, but not all rectangles are squares. Similar, all registered gold is deliverable, but not all deliverable gold is registered.

But I want you to forget about that for a moment and focus on the practical reality of how the COMEX works. Every short on the COMEX who wishes to deliver metal has to acquire suitable gold, attach a warrant to it if it doesn’t already have one attached, and then notify the exchange of his intention to deliver. The authors who talk about “leverage ratio” “deliverable gold” or “gold available for delivery” are somehow assuming that there is some public pool of gold which shorts just rush to in order to make delivery, grab the gold as fast as they can – first come first served – and then whichever shorts don’t get their hands on gold are screwed and the COMEX defaults etc etc etc. This is false. (It’s worth noting that most of the authors above are careful to note that they don’t expect an imminent COMEX default, which is all the indication you should need that they’re well aware they’re spouting nonsense. After all, if this “Open Interest / Registered” ratio mattered, it would be impossible for any sane person to not think it would cause problems at the COMEX.)

Said differently, “registered gold” is not an “available pool” shorts can simply access. Shorts who need gold to make delivery can no more lay claim to “registered gold” than they can to “eligible gold” or than they can lay claim to the gold you have buried in your backyard. Neither registered nor eligible gold are a public pool up for grabs for people to claim. There is no publicly available or accessible “deliverable” pool of “COMEX gold” – every ounce of gold stored in the COMEX-approved warehouses is owned by someone. There are more than 6mm ounces of gold in the COMEX warehouses. We don’t know who owns it. It doesn’t matter if it has a warrant attached to it or not – in either case, a short wishing to make delivery has to acquire the gold if he doesn’t own it. The COMEX Warehouse Stocks spreadsheet doesn’t tell us who owns the gold – it simply tells us which warehouse the gold is stored in!

Registered gold is not an indication that the gold is more “available” for delivery than any other gold, even though it means that the gold can be delivered into a COMEX contract without any more electronic keystrokes to attach a warrant! Eligible gold, can, of course, be converted to registered (and lo and behold, it will be converted when it’s needed, leaving charlatans to rant about “bailouts”) with a simple electronic keystroke, attaching the electronic warrant. Registered gold is not gold that’s “available for delivery” – in some sense it’s probably more accurate to describe it as gold that has already been delivered, but I wouldn’t get hung up on that notion either.

But wait – there’s more! Here’s the gold section of the COMEX Daily Report for 12/3/15:

The column on the far right is the change in open interest, and the column immediately to the left of it is the outstanding open interest. Remember that COMEX gold contracts have a specific maturity, which is another reason it is useless to tout the full ratio of Open Interest to whatever gold inventory you’re looking at! If you want to be based in the real world in terms of evaluating the impact of your ratio on anything having to do with the price of gold, you should look at Dec open interest, which currently stands at 2993, or 299,300 ounces. The ratio of Dec open interest to COMEX gold inventory is 299,300 / 6,446,930, or .046. Said differently, the amount of gold in the COMEX warehouses is more than 21 times greater than the amount of gold which needs to be delivered by the end of December. Of course, as I explained above, this ratio – like any ratio you look at – is also somewhat meaningless, because we don’t know who owns the gold in the warehouses and how they line up with the shorts who are required to make delivery. However, this ratio gives you a lot more information than the purely meaningless (total OI) / (registered inventory) ratio of 39,484,700 /121,463 = 325, which bears no relevance to any sort of practical analysis of how any settlement needs might impact the supply and demand for gold and thus the price of gold.

Furthermore, we know from looking at other reports (ie: the Commitment of Traders report) that a significant portion of the open interest is in spread positions, where traders are long one future and short another – which further distorts any (total OI)/(Inventory) ratio you look at; but that’s probably a topic for a future post.

While we’re on the topic, let’s quickly look at a chart, from Nick Laird of Sharelynx.com, of the recent history of total COMEX open interest to COMEX warehouse stocks to see if the current status quo is out of whack:

As you can see, there’s nothing exciting about the current state of this chart. It paints an entirely different picture from the deliberately misleading chart at the top of this post, eh?

We can also look at a chart (again, via Nick Laird of Sharelynx.com) of COMEX warehouse stocks vs the price of gold and notice a correlation: when the price of gold falls, less gold is stored in COMEX warehouses:

Some examples of false definitions and misinterpretations of the significance of “registered” inventory can be seen from:Jesse’s Cafe:

“The deliverable gold in the warehouses continues on the low side at about 121,000 ounces available to be delivered at these prices.”

“I believe that a portion of the gold selling in particular is an effort to knock down the open interest in gold for December. Why? Because of the incredibly high ratio of open interest to deliverable gold, which I publish frequently and was among the first to do so, although Nick Laird is the data wrangler pre-eminent on this. If there was any serious attempt for holders of those contracts to stand for delivery, even JPM, which has been obviously building up its stores of gold to act as the ‘fixer’ in that market, would not be able to cover the demand.”

Jesse seems oddly proud that he was one of the originators of this nonsense meme redefining “registered” gold as “deliverable gold.” Normally, people don’t take credit for helping to create false memes that are used to dis-inform and mis-educate hundreds of thousands of readers across a variety of blogs. Let’s continue.

on Monday the total registered and readily-deliverable “gold” held in Comex vaults was just 151,384 ounces. Dividing the registered stock into the paper obligations yields a total leverage ratio of 298:1.Again, I ask: How is this legal? How is this NOT fraud?

“What we’re talking about here is not margin leverage. Instead, this is The Banks’ ability to lever their existing supply of readily-deliverable gold. On the Comex, this is gold classified as “registered” and it is this registered stockpile that has been at record lows for over two months.”

Perhaps this one will give us a clue where Craig Hemke “learned” his false definition of “registered:”

Eligible category means that the gold meets the exchange requirements. Eligible gold essentially means that the gold is stored in COMEX warehouses. It is being stored in the COMEX warehouse for a private party or the vaulting/bullion bank, itself. It is NOT immediately available for delivery to contracts.

Registered gold means that the gold is fully available for delivery to longs who stand for bullion delivery. This gold has been certified to meet the exchange standards for purity and size. Registered gold is deliverable or available for delivery to a long contract holder standing for bullion delivery.

Eric Sprott claims there are only 3 tons of gold remaining at the COMEX – clearly referencing the balance of “registered” inventory. Earlier, he recited the same meme:

“…but people look at the COMEX which stays manipulated, which is so obvious to me what’s going on. We have 5 tons of physical gold. We have something like 1500 tons of claims against that 5 tons.”

As illustrated above, the 1500 tons (of futures open interest) expire at specific points in time in the future. The 5 tons of physical gold cited by Eric Sprott was the COMEX “registered” inventory at that time, which as you now know, is NOT equivalent to “available” or “deliverable” gold.

“As of last Friday, JP Morgan had 89.4k ounces withdrawn from the “customer”/ eligible account in its vault and it moved 122k ounces of gold from its “deliverable”/ registered account into its customer account. “

James Turk references the ratio of open interest to registered gold, equating registered gold with “gold ready for delivery”:

“The Comex’s inventory has been all but cleaned out, with the total gold contracts now more than 300 times greater than the gold ready for delivery, a record. “

Zerohedge was the one who helped bring Jesse’s meme to the masses, using their massive reach to distribute the disinformation far, wide, and repeatedly.

“…there is now a unprecedented 228 ounces of paper claims for every ounce of deliverable “registered” gold.”

Ok, so we’ve covered a variety of fraudsters, con-men, charlatans, precious metals salesmen, authors who have all made the same mistake as the foundation for their narrative. I have laid out FACTS, not opinions, which describe the reality of the COMEX process. These authors will respond with Ad Hominem attacks at me (well, they’ll ignore me until you ask them about this post, then they’ll respond with nonsense, attacks and diversions). They’ll try to change the subject – Chinese demand maybe? They’ll call me a bankster shill. They’ll call me a bullion bank apologist.

What I am, dear readers, is someone who is trying to help you base your theses in reality. I don’t know if the authors cited above (and a plethora of others) are disinforming you intentionally – in other words, that they’re con men – or if they’re just idiots, but make no mistake: they’re disinforming you, and, as I’ve said before: “when your theses are based in false foundations, you can only be “correct” out of dumb luck. One shouldn’t be surprised when the predictions made by charlatans who rely on nonsense themselves turn out to be nonsense.”

Again quoting myself from my “Precious Metals Charlatans” post of 2013, “these bloggers are DEMONSTRATING a gross lack of understanding of the markets they are purporting to be able to explain to you. This is a gift to you, dear reader, as you can clearly see that they do not know what they are talking about.”

I think it’s suitable to close with a quote from an author who relies heavily on breathless rhetoric to cover up his ample lack of understanding. It’s especially ironic that Jesse wrote these lines last week, as I’ll recite them right back to you as my advice:

Jesse: “”I know that it is fashionable these days, in the ascendancy of the self and personal will, to pick and choose and create our own realities, and facts to support them. But, alas, history suggests that people who do so will ultimately be served a banquet of consequences.””

note: this post makes nothing resembling a prediction as to where the price of gold may go. Gold may go up, but it won’t be because of some ratio which bears no relation to the COMEX process or to an accurate description of the imminent imbalance of supply and demand for gold

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